Losing Their Grip

Can China's CFOs keep their companies from growing out of control?

Few ways of getting around China are more harrowing than a nighttime taxi ride through the countryside. Invariably, such trips are taken at high speed. With one hand on the steering wheel, the cabbie will accelerate past villages, swerve around ox carts, and honk at each pedestrian and cyclist passing by. There are no streetlights. Farmers walking home from the fields suddenly loom in the dim headlights, causing the driver to slam on the brakes. There’s little a passenger can do but hope for the best — there are no seat belts.

Anyone investing in China’s stock markets these days knows how such a wild ride feels. But the unruliness — and anxiety — accompanying white-hot growth is also disturbing the country’s CFOs. They worry that their companies, like the Chinese stock market itself, may be growing beyond control and could be headed for disaster.

A recent survey of Chinese financial executives conducted by CFO China (one of CFO magazine’s sister publications) shows how pervasive that anxiety has become. Just over half of the survey’s 359 respondents say that growth isn’t under control in their companies. In particular, the CFOs worry about their ability to respond to any problems that crop up. “Risk management is not done well at most Chinese companies,” says Louis T. Hsieh, CFO of New Oriental Education & Technology Group, a Beijing-based private education services company, and a board member at several Chinese listed companies. “That’s because they haven’t faced [risk] yet. These companies are expanding like crazy, and everything they make they can sell.”

A growing chorus of market observers is warning that China’s market boom won’t end well. How damaging a crash would be to China’s economy remains to be seen; the Shenzhen and Shanghai markets remain small relative to the country’s overall economy. For listed companies, however, any downturn could have severe effects.

True, in interviews and at conferences, China’s CFOs display an infectious enthusiasm about their businesses. Most can rattle off IPO details and cite today’s percentage rise in their company’s stock price. But they see problems, too. Finance executives worry about their rudimentary financial-reporting systems, complain about business managers who focus solely on topline growth, and wonder whether they can achieve the level of financial transparency required of listed companies.

The survey confirmed many of these worries. For CFOs of listed companies, the number-one growth-related concern is that the development of internal controls isn’t keeping up with corporate growth, with nearly two-thirds saying this is a problem. Other worries include the lack of attention given to the quality of growth (53 percent), managers who don’t understand business risk (46 percent), and a failure to properly analyze investment decisions (41 percent).

The survey also shows that financial executives see weaknesses within their own functions. For example, only 39 percent of listed-company CFOs think they can manage risk well, and just 41 percent say they are happy with the quality of internal financial reporting.

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